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Stakes Are High As BWX Expands Its Reach

Small Caps | Mar 06 2018

BWX is expanding its personal care business and in the wake of substantial acquisitions, the stakes are high in the US.

-Marketing expenditure needs increase significantly
-Slump in the share price provides corporate appeal
-Integrating acquired businesses critical to growth


By Eva Brocklehurst

Personal care product manufacturer and distributor BWX ((BWX)) continues to expand its business both domestically and offshore, but several brokers have raised concerns about elevated risk stemming from US acquisitions.

The company has provided a guidance range for the first time and FY18 operating earnings (EBITDA) are forecast to be $42-46m which, at the mid point, represent a -10% downgrade to Moelis' estimates. Excluding the impact from US assets Mineral Fusion, Nourished Life and Andalou Naturals, organic growth was broadly flat.

Marketing expenditure increased significantly in the first half, representing around 20% of sales. Given an entrance into Coles ((WES)) and the traditional skew to the first half, Moelis accepts this, and understands second half expenditure will reduce to 13% of sales.

Factoring in new distribution channels, which require a one-off investment, the broker suggests around 15% of sales is a more reasonable level of advertising expenditure. On the back of the longer-term opportunities, Moelis retains a Buy rating with a $5.60 target.

Shaw and Partners believes the slump after the first half result has left the stock with corporate appeal. For the first time in a while the broker believes the valuation is compelling, pointing out the business is not just about the Sukin brand but a North American footprint that, through Mineral Fusion and Andalou, is equivalent to the existing business.

The broker downgrade earnings estimates, primarily because of a reduction in assumptions around the growth for the acquisitions in the US as well as a moderation of growth for Sukin in the pharmacy channel. The broker believes the market has over-reacted and considers the stock an opportunity, maintaining a Buy rating and $6.22 target.

Bell Potter is less enthusiastic. Both sales for Sukin and earnings margins were below forecasts. Guidance is also below forecasts, partly because of the impact from the company's decision to discontinue third-party manufacturing and distribution while focusing on core brands.

For Canaccord Genuity the company will need to prove it is generating reasonable organic growth. The broker has a growing list of concerns, although the strong organic growth has largely mitigated the issues to date. Now that growth has slowed, a further multiple de-rating could be nigh, the broker suggests.

Concerns highlighted include increasing competition, margin pressure and marketing expenditure. The company is also integrating three acquisitions in essentially new markets. On the positive side, cash flow was reasonable in the half-year, as was the valuation. Canaccord Genuity maintains a Hold rating and reduces the target to $5.31 from $6.40.


Domestic Sukin sales were up 9.5% but, eliminating revenue from Coles, Moelis calculates growth in the pharmacy channel has dropped to 3%. Going forward, the broker expects minimal growth in the pharmacy channel and expansion in grocery will support domestic growth.

The sales growth rate for Sukin offshore also appears to be slowing. Moelis is disappointed that the roll-out in Malaysia and expansion in Canada is taking longer than previously expected.

Ranging of the product in the US should be beneficial in the second half but the broker remains cautious about uptake because this is new product in a highly competitive market.

Moelis asserts the company will need to differentiate the Sukin brand, which will require a heightened level of investment, while execution risk remains high. That said, if successful, the offshore expansion can provide a long period of growth.

US Acquisitions

US acquisitions underperformed, with the weakness at Mineral Fusion attributed to one-off channel stocking by the previous owners. Moelis is encouraged by evidence that the business continues to grow yet, despite integration with Andalou Naturals, remains disappointed that the outlook for growth is not stronger.

Integrating the acquired businesses is critical to the growth outlook, as Bell Potter estimates Mineral Fusion, Andalou and Nourished Life will account for around 55% of revenue in FY19. Hence, the broker is concerned that the first six months contribution from Mineral Fusion missed revenue estimates by around -20%.

The stock may appear cheaper but the broker believes, at this point in time, the risks around the growth outlook are elevated. Bell Potter maintains a Hold rating and lowers the target to $5.30 from $7.10.

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